RECOMMENDATIONS AND POSITIONS
At its 23rd session held on 14 November 2023, the Fiscal Policy Commission (hereinafter: the Commission), examined the Draft State Budget of the Republic of Croatia and the Financial Plans of Extra-Budgetary Users for 2024 and the Projections for 2025 and 2026 (hereinafter: the Draft) which was adopted by the Government of the Republic of Croatia (hereinafter: the Croatian Government) on 9 November 2023 at its 262nd session.
The Draft Amendments to the State Budget for 2023 foresee a significant increase of both state budget revenues and state budget expenditure. This is primarily a consequence of continuous economic growth and high inflation. Croatian public finances are undergoing an expansive stage where the structural (and nominal) deficit is increasing. The Commission invites the Government to limit, when proposing the state budget, the growth of the public expenditure-to-GDP ratio as an important determinant of fiscal sustainability. Owing to strong economic growth and high inflation, a strong decrease of the public debt-to-GDP ratio was achieved, improving the state of public finances. However, despite the significant decrease of the public debt-to-GDP ratio, the size of general government measured by the general government debt-to-GDP ratio, has been increasing significantly, and the Commission warns that the growth of expenditure must be kept under control. Furthermore, the Commission reiterates the need to implement structural reforms bearing in mind the real limitations of the Croatian economy and its structural weakness, as well as to maximize the use of EU assistance for development activities. Although Croatia is still undergoing the favourable stage of the economic cycle, the situation can overturn very quickly, meaning that, should economic activity slow down significantly, public finances would be exposed to higher risks.
Despite unfavourable global trends, Croatia’s economic activity achieved strong growth in the first semester of 2023. Such growth, due to favourable labour market trends and significant price increase also facilitated an increase in revenue collected from taxes. At the same time, fiscal expenditure also increased but at a slower pace than income, finally resulting in a surplus of both the state budget and the general government budget. Data on the execution of the state budget in the first half of 2023 indicate that state budget income is being achieved at a satisfactory level, meaning that the total planned budgetary income at the level of the entire 2023 could also be achieved in accordance with the projections. At the same time, state budget expenditure increased, primarily as a consequence of high inflation and Government measures. Such circumstances represent significant risks in the sense of increasing expenditure, which, in case of the materialization of negative risks and significant slowing down of economic growth, could undermine the state of Croatian public finances. Therefore, the Commission highlights the importance of continuous monitoring and examining the fiscal position of Croatian economy, as well as of increasing available fiscal room, so that fiscal policy could act promptly and efficiently in case economic growth slows down and unforeseen fiscal risks are realized.
At its 18th session held on May 22, 2023, the Fiscal Policy Commission examined the Draft Amendments to the State Budget of the Republic of Croatia and Financial Plans of Extra-Budgetary Users for 2023 and Projections for the Years 2024 and 2025 adopted by the Government of the Republic of Croatia on May 19, 2023 at its 218th session.
The Fiscal Policy Commission (hereinafter: the Commission), at its 16th session held on 21 November 2022, examined the Draft State Budget of the Republic of Croatia and the Financial Plans of Extra-Budgetary Users for 2023 and the Projections for 2024 and 2025 which was adopted by the Government of the Republic of Croatia at its 166th session held on 14 November 2022.
20th Position Paper of the Fiscal Policy Commission on the Draft Budgetary Plan of the Republic of Croatia for 2023
At its 15th session held on 24 October 2022, the Fiscal Policy Commission (hereinafter: the Commission) examined the Draft Budgetary Plan of the Republic of Croatia for 2023 (hereinafter: the Draft) which was adopted by the Government of the Republic of Croatia (hereinafter: the Government) at its 159th session held on 19 October 2022.
The Fiscal Policy Commission evaluated the first Draft Budgetary Plan of the Republic of Croatia for 2023. Considering the current global circumstances and 2023 being characterized by a pronounced economic uncertainty and high geopolitical risks, it is appropriate to continue the former practice of conservative budget planning. After a strong recovery and growth in 2021 and the first half of 2022, the prospects for 2023 are less favourable. This creates an uncertain framework for economic and fiscal policy and could necessitate its adaptability. In such circumstances, the main task of fiscal policy will be to mitigate the effect of external shocks on the Croatian economy and help the most vulnerable groups which will be most affected by those shocks. Because of the economic slowdown, cyclical general budget income will grow at a slower pace, while the growth of the general budget expenditure will depend on intensified investment spending related to EU-funds, which represents the main lever of countercyclical action. Therefore, the Commission highlights the need to prepare, as realistically as possible, as many quality and sustainable investment projects as possible. The Commission repeats its warning about certain challenges in the existing capacities and the key stakeholders’ readiness to undertake the necessary structural reforms within the framework of the overall public sector (especially in healthcare and public administration, but also in the other sectors).
19th Position Paper of the Fiscal Policy Commission on the Draft Amendments to the State Budget of the Republic of Croatia and the Financial Plans of Extra-Budgetary Users for 2022
At its 15th session held on 24 October 2022, the Fiscal Policy Commission (hereinafter: the Commission) examined the Draft Amendments to the State Budget of the Republic of Croatia and the Financial Plans of Extra-Budgetary Users for 2022 adopted by the Government of the Republic of Croatia on 19th October 2022 at its 159th session.
The Draft Amendments to the State Budget for 2022 foresee a decrease in the deficit of the general government budget and of public debt measured according to the share in the GDP in 2022. Fiscal policy in 2022 was largely marked by the unexpectedly high increase in tax revenue due to the strong real and nominal GDP growth and the effect of inflation, as well as due to the measures for alleviating the consequences of increasing energy prices. The Commission agrees with these Draft Amendments and highlights the need to continuously monitor the position of the Republic of Croatia in order to facilitate the adjustment of fiscal policy in uncertain and volatile circumstances and ensure continuity and responsibility which guarantee long-term sustainability of Croatian public finances. The Commission underlines that it is necessary to constantly bear in mind the consolidation of public finances, and that most of the available funds, especially those from European sources, must be planned more realistically and used more efficiently and directed as much as possible into activities which will preserve and support economic growth. As many times before, it also highlights the need for improved expenditure planning and control, and calls for structural reforms. Due to the possibility of realization of a number of (global) negative risks in the upcoming period, it is extremely important to manage Croatian public finances wisely.
18th Position Paper of the Fiscal Policy Commission on the Draft Annual Report on the Execution of the State Budget of the Republic of Croatia for the First Semester of 2022
At its 13th session held on 5 October 2022, the Fiscal Policy Commission (hereinafter: the Commission) discussed the Draft Semi-Annual Report on the Execution of the State Budget of the Republic of Croatia for the First Semester of 2022 adopted by the Government of the Republic of Croatia on 29 September 2022.
In 2021, the Croatian economy saw unexpected growth which continued throughout the first half of 2022 despite intense global shocks and pressures in terms of global disruptions and blockages in the supply chains, increasing energy prices and very high and growing inflation. Strong (real and nominal) economic growth had a favourable effect on Croatian public finances through the growth of income and decrease of the public debt burden (share in GDP). The Commission warns that in the upcoming period when the risk of deceleration of economic activity and of a recession will rise abruptly, the Croatian economy might be faced with numerous limitations such as a low potential growth level, pronounced price pressures on the economy and on the citizens’ standard of living as well as monetary policy tightening. Faced with these challenges, fiscal policy should be as targeted and as selective as possible so as to prevent additionally increasing mid-term inflationary pressures, bearing in mind at the same time the sustainability of public debt because, in a situation of a contractionary monetary policy, loans taken on by the general government might become much more expensive and thus become a serious problem. The Commission emphasizes the need to continuously monitor Croatia’s fiscal position so as to allow fiscal policy to adjust in uncertain and changed circumstances and ensure the continuity of a responsible fiscal policy for the purpose of long-term sustainability of Croatian public finances.
At its 12th session held on 16 May 2022, the Fiscal Policy Commission (hereinafter: Commission) discussed the Draft Amendments to the State Budget of the Republic of Croatia and Financial Plans of Extra-Budgetary Users for 2022 and the projections for 2023 and 2024.
The Commission considers the proposed macroeconomic and budgetary plans to be appropriate for the current situation, and highlights the need that EU funds be utilized as much as possible to finance investments and reforms for the purpose of stimulating productivity growth, and reiterates the importance of implementing reforms to restrain the growth of expenditure for healthcare, pensions and compensations for employees. It also points to the increasing risks of inflation growth and economic consequences of the war in Ukraine that demand an active response of economic and fiscal policy holders.
At its 12th (online) session held on 16 May 2022, the Fiscal Policy Commission (hereinafter: Commission) discussed the Draft Annual Report on the Execution of the State Budget of the Republic of Croatia for 2021 adopted by the Government of the Republic of Croatia (hereinafter: Government) at its 118th session held on 12 May 2022.
The Commission holds that fiscal policy in 2021 was appropriate, because it enabled strong fiscal changes in response to the COVID-19 crisis, and responsible, because it did not endanger mid-term fiscal sustainability. However, the Commission reiterates the need to implement decisive reforms in the healthcare and pension sector as well as in the domain of employee compensation as these areas are in fact the largest load on the state budget.